Category Archives: Investing Money

This Stock Market Rally Is Going To Fall Apart

roller coaster2My Comments: Another brick in the pile that says we’re headed for a market correction. A major clue is called the price to earnings ratio or P/E. It’s a readily available metric that helps understand relative valuations. The Shiller CAPE ratio is today recognized as the better measurement of market valuations. Currently, it is almost 63% higher that it’s historic mean. That comes back to a statistical law called reversion to the mean. What goes up also goes down.

Bob Bryan Aug. 4, 2016

A common refrain around the markets and economy is that expansions don’t die of old age. But that doesn’t mean they can’t still get a bit weary.

The recent run-up in stocks to an all-time high comes in the eighth year of the current bull market, making it the second-longest such market in history. Given the bull market’s “old age,” this recent upswing isn’t going to last very long, according to Jonathan Glionna at Barclays.

Glionna, head of US equity strategy research, argued in a note to clients on Wednesday that while the recent stock surge has come on the back of strong economic data, it is not enough to push the market higher over the long term.

The strategist came to this conclusion by analyzing three previous late-stage rallies since 1980 — 1988 to 1989, 1998 to 1999, and 2006 to 2007 — and identifying three conditions that are needed to make them sustainable. They are:
1. Increasing profit margins. Profit margins in each of the past three late-stage rallies hit new cycle highs in order to sustain the rally. This time around, margins have been on the decline since the third quarter of 2014, and even with a recent bounce in aggregate profits, a new cycle high seems unlikely.
2. Growing dividends. In each of the past three occurrences, dividends from S&P 500 companies have been increasing at a rapid pace. “Fast and accelerating dividend growth was present throughout each of the last three prolonged late-cycle rallies,” Glionna wrote. “But, dividend growth has begun to slow. We project a 6% increase in dividends for the S&P 500 in 2016. This is the lowest growth rate since 2010.” Additionally, forecasted growth for the next year is just 4.5%, showing a clear slowing pattern.
3. Increasing leverage. This one is happening, according to Glionna, but it may not have much more room to grow. “While this may be a sustainable amount given the easy conditions and low rates in high grade credit, the days of accelerating growth in borrowings are likely in the past, in our view,” Glionna wrote.

“This is because some important measures of debt sustainability, such as the ratio of debt-to-EBITDA are already elevated.” Essentially, companies are running out of room to borrow more.

Each of these three trends is a sign that companies could continue to grow more in the future. Since the stock market is essentially an investment on future expected growth and earnings, then higher profits, income from dividends, or growth through leverage would inspire investor confidence.

With each of these trending in the wrong direction, investors are less likely to assume that the future of a company is going to be brighter, which in turn means the stock price is less likely to increase. Thus, investors stay out of the market, and there goes the rally.

As we have mentioned before, it’s fair to point out that past cycles may not necessarily be predictive of the current one, and a lot has changed in the markets and economy since the financial crisis.

However, past occurrences are many times all we have to predict future events. And right now, the past isn’t saying anything good.

The source article can be found HERE.

Don’t Expect To Make Any Money In The Market For The Next 7 Years

InvestMy Comments: I have no idea whether this will prove to be true or not. But it sure enters my thinking whenever I talk about money with clients and how they are going to pay their future bills. And how I’m going to pay my bills.

John Mauldin,  Economics,  Jul. 28, 2016

The next recession is coming, and it will be severe.

My friend Ed Easterling of Crestmont Research just updated his Economic Cycle Dashboard and sent me a personal email with some of his thoughts.

The current expansion is the fourth longest since 1954… but also the weakest. Since 1950, average annual GDP growth in recovery periods has been 4.3%.

This time, average GDP growth has been only 2.1% for the seven years following the Great Recession. That means the economy has grown a mere 16% during this so-called “recovery.”

If this were an average recovery, total GDP growth would have been 34% by now… instead of 16%. So, it’s no wonder that wage growth, job creation, household income, and all kinds of other stats look so meager.

I think the next recovery will be even weaker than this one (the weakest in the last 60 years) because monetary policy is hindering growth.

Now, combine a weak recovery with Negative Interest Rate Policy or NIRP. Asset prices are a reflection of interest rates and economic growth. And both are just slightly above or below zero. So, how can we really expect stocks, commodities, and other assets to gain value?

The upshot is that traditional investment strategies will stop working soon. Ask European pension income recipients about their fears.

Welcome to 0% returns for the next 7 years

All bets may be off if the latest long-term return forecasts are correct. Here’s a chart from my friends at GMO showing the latest 7-year asset class forecast.


See that dotted line, the one that not a single asset class gets anywhere near? That’s the 6.5% long-term stock return that many supposedly wise investors tell us is reasonable to expect.

GMO doesn’t think it’s reasonable at all, at least not for the next seven years.

If GMO is right—and they usually are—and you’re a devotee of passive or semi-passive asset allocation strategy, you can expect somewhere around 0% returns over the next seven years… if you’re lucky.

See that nearly invisible -0.2% yellow bar for “U.S. Cash?” It’s not your eyes. Welcome to NIRP, American-style.

The Fed’s fantasies notwithstanding, NIRP is not conducive to “normal” returns in any asset class. GMO says the best bets are emerging-market stocks and timber.

Those also happen to be thin markets. Not everyone can hold them at once.

Prepare to be stuck.

Why low-volatility ETFs are now a high-stakes gamble

roller coaster2My Comments: I don’t normally post anything on this site on weekends. But there is so much going on these days that I either have to start posting twice a day during the week or from time to time on the weekend.

ETF’s are as significant a step in the evolution of money management as were mutual funds in the early part of the 20th Century. I’m increasingly using them when it comes to my money and to that of my clients. For those of you that find all this mind numbing, please feel free to ignore it. (My source article is found HERE.)

By John Prestbo July 27, 2016

Wall Street is doing a booming business with investors who want to avoid the jitters brought on by a rocky stock market. So booming, in fact, that the performance and purpose of low-volatility investments now pose the very risks they were meant to avoid.

More than $50 billion has poured into low-volatility indexed exchange-traded funds over the past five years or so, in the wake of the 2008-09 market meltdown. There are now 14 “lo-vol” ETFs with assets exceeding $100 million each, and many more with less. Whenever the market hits a pothole, these ETFs enjoy a bump-up in assets.

Six ETFs in the lo-vol space have attracted more than $2 billion of assets apiece. The oldest fund is PowerShares S&P 500 Low Volatility Portfolio SPLV, +0.12% which began trading in May 2011 and now lays claim to almost 20% of lo-vol assets.

Yet the second-oldest lo-vol ETF is actually almost twice as large. The iShares Edge MSCI Minimum Volatility USA ETF USMV, +0.21% dominates the group, with close to 40% of the assets. One reason may be that it has the lowest management fee among the top six. Its success, in fact, spawned an iShares family of lo-vol ETFs with the “Edge” brand.

These ETFs mostly live up to their billing. Most of them achieve low volatility by holding those stocks in an index that fluctuate less than the overall index. Some newer models contrive triggers to move out of stocks and into cash when the market slumps, and to move back into stocks when the slump ends.

Whatever the methodology, lo-vol ETFs aim to be a sleep-better substitute for the broad-market indexes from which they are derived. They decline less in downturns, but tend not to rise as much in rallies — or take longer to get to the same place. Investors tend to overlook the “hidden” cost of this upside gap.

On its website, iShares says its minimum volatility USA ETF historically captured 83% of a broad index’s up months and 44% of the down months. Curiously, iShares uses the S&P 500 SPX, +0.16% rather than the MSCI USA index to calculate these statistics. By contrast, PowerShares declares on its website that its lo-vol ETF delivered 77% “up-capture” and 43% “down-capture” since inception.

That means, for a $10,000 investment and a base index that rises 10%, the iShares ETF would leave $170 on the table from a potential $1,000 gain and the PowerShares ETF would leave $230. Those amounts may look like hotel-room rates, but the upside shortfalls accumulate over time.

In other words, the longer you want to sleep well, the more expensive it could get in terms of foregone capital appreciation.

This year’s market potholes so far — the year-opening tumble and the surprise Brexit vote — are not good illustrations of how lo-vol vehicles are supposed to work. These ETFs did fall much less than the base indexes in both cases, though the “downside capture” was larger than average.

But both of these ETFs bounced back more quickly and strongly than the base indexes. Indeed, these lo-vol ETFs are more than doubly outperforming their base indexes this year through July 22.

This upside-down situation is the result of all the assets pouring into these lo-vol ETFs. The iShares fund is the third-largest asset-gathering ETF this year, according to ETF.com — and as always, money coming in pushes prices up. Another result: The lo-vol ETFs this year are roughly 25% more volatile than the market.

These conditions won’t last. Reversion to the mean could disillusion investors already holding lo-vol vehicles. And for those thinking about adding lo-vol to their portfolios this state of affairs is a red-light warning that now probably isn’t the best time to get in.

Whether any time is right for lo-vol is a personal decision because it touches on fear about loss. If every little market swoon pumps up your blood pressure, lo-vol may be the answer. But be aware of the costs and consequences.

John Prestbo is retired as editor and executive director of Dow Jones Indexes, now part of S&P Dow Jones Indices, in which Dow Jones & Co., publisher of MarketWatch, holds a small interest. Prestbo also is an adviser to MarketGrader Capital, which scores stocks on the basis of fundamental factors and chooses components of the Barron’s 400 Index.

Stick To Your Investment Strategy Amid Market Volatility

InvestMy Comments: Over the past 40 years that I’ve helped people with their money, there have been more ups and downs than you can imagine. In many of them, especially during the ‘downs”, people have asked me to find another option. Usually we did, and it wasn’t long before we realized we should have stayed the course. Not always, but it’s made me reluctant to jump through hoops during the inevitable down markets. This article supports the notion that if your goals have not changed, then you should simply ignore everything else and get on with the rest of your life.

Thursday, Jul. 07, 2016 by Thane Stenner @ The Globe and Mail

Setting a goal is not the main thing. It is deciding how you will go about achieving it and staying with that plan. – Tom Landry

With National Football League training camps opening up next month, I’m reminded of the wise words of the great former Dallas Cowboys coach and Football Hall of Famer Tom Landry and how this applies to a successful investment strategy.

While the late Mr. Landry was a great innovator as a football coach, he also was able to coax maximum effort out of his players and provide motivation and encouragement that allowed them to succeed and win two Super Bowls. A good financial adviser can provide this same type of guidance and coaching in helping clients navigate market volatility and stay the course to reach their investment goals.

As the past month has taught us with Britain’s decision to leave the European Union and the resulting global market volatility, investors face emotional challenges in staying disciplined.

Research by Vanguard found that missing just the 10 best trading days can result in an annualized return of minus 11.32 per cent compared to a gain of 1.66 per cent by staying in the market and riding out the volatility (see chart below). Consistently and over time, the investors who do well are often those who stick to their long-term plans and are rewarded for their patience.

“Our research shows that financial advisers can add significant value by implementing certain relationship-oriented strategies through holistic financial planning, discipline and guidance rather than trying to consistently outperform the market,” said Atul Tiwari, Vanguard Canada’s managing director.

The role of a financial adviser has evolved from simply picking stocks to put into a client’s portfolio into more of a coach who counsels clients on the benefits of a particular strategy, helps address their emotional needs and steers them through turbulent periods. Kind of like how the role of a football coach has evolved from simply drawing and calling plays to motivating his players and enabling them to succeed.

Here are three principles that apply to not just football but investing:

You need the right tools.

To be a great coach, player and investor, you need the right tools. One of those are exchange-traded funds (ETFs). They are a great way to broadly diversify your portfolio and keep costs low, leaving you with more money in your pocket.

The popularity of ETFs has really boomed in Canada over the past few years, with assets surpassing $100-billion recently and more than 400 ETFs available on the Toronto Stock Exchange. This strong growth has accelerated over the past few years, as investors see the benefits of ETFs due to their low fees, quick diversification and the ability to buy and sell them like a stock.

“Many ETFs offer the benefit of low investment fees, which impact your return and add up over time,” said Mr. Tiwari. “Studies have shown that low costs are the best predictors of future performance.”

Choose a game plan and stick to it.

Emotions are part of investing and sometimes it is difficult to filter out the noise and negative headlines, stay patient and position yourself for success. But choosing a goal with your financial adviser and staying disciplined in following it – whether that’s paying off debt, saving for retirement, or transitioning into the deaccumulation phase of life – is a key pillar of investing success.

You can’t win them all, but having the right program helps.

Even Tom Landry lost a few Super Bowls. But history has shown that the market rewards discipline, diversification and patience over the long term.
It is impossible to beat the market all the time, but having a long-term outlook with clear goals and not overreacting to short-term events will win out in the long run. It may even get you into the investing hall of fame.

Thane Stenner is portfolio manager and director of wealth management of StennerZohny Investment Partners+ within Richardson GMP. He is a founding member and chairman emeritus of TIGER 21 Canada and author of True Wealth.

The case for ETFs in 3 charts

My Comments: As is true in all life, evolution happens. This includes investing your money for the future. A major evolutionary step was the introduction of ETFs. They are as significant a step as was the introduction of mutual funds in the early years of the 20th Century. It’s in your best interest to understand them and employ them when you can.

Source: http://qz.com/720236

You’re probably familiar with the concept of mutual funds, and may even own at least a few in your 401(k) or other accounts. Yet, you may be less informed about another investment vehicle that has become widely used by many types of investors: exchange-traded funds (ETFs). You may even own them and wonder what they are.

First, a basic definition. ETFs combine familiar features of mutual funds and individual stocks. Like mutual funds, most ETFs are made up of many stocks, bonds or other assets. Like an index fund, an ETF aims to track the performance of a specific market benchmark, like the S&P 500 or the Russell 2000. And like shares of stock, ETFs are traded on an exchange throughout the day.

Want to get grounded in ETFs? Here are three facts to get started.

One: ETFs are not niche products

ETFs have been around for more than two decades, but they’ve really taken off in the past five years or so. Today, investors of all types — from individuals to sophisticated institutions — have helped increase ETF assets to more than $3.1 trillion globally. And while that’s still a fraction of the $21 trillion invested in mutual funds, ETFs are growing at a faster pace, more than doubling in size over the past five years.

Part of the appeal of ETFs is their flexibility. Unlike mutual funds, which can only be bought or sold once a day, at a price established at the market close, ETFs can be traded whenever the market is open, just like stocks. Investors can also trade them in the same way they do stocks, including selling short, or buying on margin, and there is no minimum investment amount required. Learn more about the differences between ETFs and mutual funds here.

Two: Lower costs help you keep more of what you earn

An even bigger draw of ETFs is the bottom line—reducing costs. The fees for most ETFs tend to be much lower than mutual funds, which means more money gets put to work for you.

In fact, iShares Core ETFs average about one-tenth the net expense ratio of most mutual funds.² The impact of these cost savings can be meaningful, particularly over time or when market returns are sluggish.

Here’s another potential benefit. ETFs tend to be relatively tax efficient and incur fewer undesirable capital gains distributions. So you can save up front, over time and on your tax bill.

Source: Chart reflects the hypothetical growth of a fictional investment of $250,000 with an 8% return and assumes the reinvestment of dividends and capital gains. Fund expenses, including management fees and other expenses have been deducted. The graph is for illustrative purposes only and is not indicative of the performance of any actual fund or investment portfolio.

Three: ETFs make it easy to get in—and stay in—the market

Ultimately, of course, pursuing your financial goals is about staying invested. Timing market ups and downs is nearly impossible to get right, and missing out on the rebounds can be costly. In the example here, missing just the five top-performing days over the past 20 years would have cost more than $160,000; missing the top 25 days would have nipped nearly 75% of potential gains.

So instead of trying to outsmart the market, it may make more sense to simply be in the market, smartly.

The graph above shows how a hypothetical $100,000 investment in stocks would have been affected by missing the market’s top-performing days over the 20-year period from January 1, 1996 to December 31, 2015.

Do Record Low Yields And Record High Stocks Spell Trouble?

roller coaster2My Comments: This week I’ve focused my posts on what other people think is likely to happen to your money if you have it invested in stocks and bonds. It’s pretty obvious that no one has a clue.

Until a lot of stuff gets sorted out, my recommendation is to go to cash and sit on the sidelines for a few weeks or more. I think the chances of losing money right now are higher than the chances of making money, which is what most of us are trying to do.

Of course, if you wait several weeks, and nothing bad happens, and you jump back in, be assured that within a few days, if not hours, the bottom will fall out. It’s your call.

Bryan Rich Jul 13, 2016

Earlier this week we talked about the disconnect between yields and stocks.

The move lower in German yields, given the contagion risk in Europe that people have feared from Brexit, as we’ve discussed, has also dragged down U.S. yields. With that, the U.S. 10 year yield, post-Brexit, has traded to new record lows.

So we have record highs in U.S. stocks, and record lows in U.S. yields.

For people looking for the next reason to be worried, this is where they are hanging their hats. But is the uneasiness associated with this divergence warranted?

Let’s take a look at the chart…

Now, you can see from the chart, we recently breached the record lows of 2012 in U.S. yields (the green line).

For a little back-story: Back in 2012, Europe was on the verge of sovereign debt defaults that would have blown up the euro and the European Union. The ECB stepped in and promised to do “whatever it takes” to preserve the euro, which included the threat of buying unlimited Italian and Spanish government bonds (the real threatening spot in the crisis). That sent bond market speculators, which had been running up the yields in Spanish and Italian debt to unsustainable levels, swiftly hitting the exit doors. At the height of that threat, global capital was pouring into U.S. government debt, which sent the 10 year yield to record lows.

Still, U.S. stocks at the time were in solid shape, UP nearly 8% on the year in the face of record low bond yields.

What happened when the ECB stepped in and curtailed the threat? U.S. yields bounced aggressively. And U.S. stocks went even more sharply higher, finishing the year up 16%. In fact, the U.S. 10 year yield more than doubled (to as high as 3%) over the next seventeen months, and the S&P 500 added to 2012 gains, going another 32% higher in 2013.

So we have a very similar scenario now — and the drag on U.S. yields is, again, Europe and the threat to the euro and European Union.

And again, U.S. yields have hit new record lows, and stocks are putting up a solid year, as of July (the same month the tide turned in 2012).

We would argue, for the many reasons we’ve discussed in our daily notes, that stocks are in the sweet spot. As long as a global economic shock doesn’t occur, which is what central banks have proven very capable of managing over the past seven years, U.S. stocks should continue to benefit from the incentives of record low interest rates. And when market rates/yields rise, it’s only because the clouds of uncertainty clear. That’s very good for stocks too.

Why Interest Rates Are Lower Than Ever

bear-market--My Comments: Please keep reading…

Paul J. Lim  July 6, 2016

If you think the financial panic over Brexit is over — because stocks have bounced back somewhat from their initial sell off — think again.

As scared investors continue to seek shelter in boring government bonds, fixed income prices have soared while yields on 10-year Treasury securities plummeted to as low as 1.34%, marking the lowest levels ever seen in U.S. history.

In early morning trading Wednesday, yields bounced slightly to 1.37%. But that’s a far cry from the 5% yields on 10-year Treasuries before the global financial crisis.

Overseas, the situation has gotten even worse: 10-year German and Japanese bonds have sunk further into negative yield territory, which means investors are so concerned about the economy that they’re willing to pay officials for the right to park their money with the government.

Aren’t record low rates a good thing?

Normally, investors crave low interest rates because cheap borrowing costs encourage spending and capital investments, which fuel economic activity and growth. Low rates also offer relief for debt-laden governments and consumers, who can now refinance existing loans at better terms.

But ultra-low interest rates can also be a sign that investors are so worried about stagnation or recession that their primary focus is on the safe return of their capital—that is, making sure they can simply get it back—not earning big returns on their capital.

The uncertainty caused by Britain’s unprecedented move to leave the European Union has fueled fear over what’s to come for the global economy. And in times of fear, investors generally flock to bonds, which drives up their prices and drives down their yields. (Market interest rates move in the opposite direction of bond prices.)

Less than two weeks after the vote, economists have already been ratcheting down their expectations for growth overseas. IHS Global Insight, for instance, now believes the gross domestic product among countries in the Eurozone will grow just 1.4% this year and 0.9% next year. Before Brexit, the economic research firm had been forecasting Euroepean economic growth of 1.7% this year and 1.8% in 2017.

How scared should you be?

It’s far too soon to tell if the U.S. is also headed for negative rates. But one thing is clear: The so-called “yield curve” is flattening out. And that normally spells trouble for the economy.

The yield curve refers to the spectrum of rates paid by Treasuries of various maturities. Normally, longer-dated Treasuries — such as 10- or 30-year bonds that require investors to tie up their money for extended periods of time — pay substantially more than short-term debt, which poses less risk.

Yet when fear over the economy bubbles over, investors tend to flock into long-term bonds, driving down long-term yields. And when that happens, the gap between what short- and long-term bonds are paying decreases and the yield curve “flattens.”

Ed Yardeni, president and chief investment officer at Yardeni Research, points out that the spread between yields on 10-year and two-year Treasuries is the flattest it has been since November 14, 2007. Indeed, the spread between 10-year and two-year yields is down to just 0.8 percentage points. A year earlier, it was roughly double that.

Why is this important? Because Nov. 14, 2007 was just two weeks before the start of the 2007-2009 recession that coincided with the global financial crisis.

If the yield curve actually inverts — meaning 10-year Treasuries start paying less than two-year Treasuries — it’s virtually certain that the economy is in or headed for recession.

If the economy is so scary, why are stocks doing reasonably well?

That’s a good question. IHS Global Insight economist Patrick Newport points out that “the seemingly contradictory demand for stocks given the rally in bonds is likely driven by the perception that the Federal Reserve will further delay raising rates in the wake of the Brexit vote, making stocks more attractive in terms of returns.”

Income-oriented investors, who’ve been frustrated by the paltry yields being paid by bonds, may also be driving this trend.

Back in the early 1980s 10-year Treasuries were yielding 10 percentage points more than the dividend yield on blue chip U.S. stocks, notes Jack Ablin, chief investment officer at BMO Private Bank. “Nowadays that gap has disappeared and then some,” he said. Indeed, today, the dividend yield on the S&P 500—what you get for holding the stocks above and beyond stock price appreciation—is more than half a percentage point higher than what 10-year Treasuries are paying.

This trend could persist and stocks could keep rising for months on the strength of income investors. The problem is, if the bond market is right and the economy is this weak, eventually the stock market will get the message too.